One of the more powerful but under-appreciated categories of patterns are very short term drift patterns in strongly trending markets. Flags, pennants and small lateral trading ranges can all fall into this category. The patterns are fractal, that is, they appear across all time frames.
I find small multi drift patterns invaluable. First, they are ubiquitous. They appear in virtually all trends and time frames. Second, their completion affirms that underlying trend remains intact. Finally, the manner in which they develop, for instance, the slope, extent and volume of the counter trend move can all offer clues as to the underlying strength of the trend.
Most strong trends unfold in a push - drift - push pattern, sprinting quickly in the direction of the trend, accruing a short term overbought or oversold, and then drifting counter to the sprint. As these patterns "drift" against the prevailing trend, they alleviate the short term overbought or oversold condition that accrued during the sprint. You can think of the drift as a "pause that refreshes."
It is important that the market DRIFT. The best examples contain overlapping price ranges (in whatever perspective you are working in) and don't typically retrace much of the prior sprint. Volume should generally decline throughout the pattern, particularly if the pattern builds over 5-10 periods. The best examples have substantial range overlap from day to day.
The classic literature requires a sharp move, or a flag pole, for these patterns to fly from, a decline in volume as the pattern builds and that the pattern last no more than 10-15 bars. In my experience, finding drift patterns that fill all these "requirements'' is difficult. My personal approach minimizes the requirements. As long as the pattern occurs after a decent thrust (I prefer the thrust to go to new high or low ground) and then drifts against the prevailing trend, I can use it to develop either a fresh entry to the prevailing trend or simply as a validation of the underlying trend.
Importantly, the pattern is typically better defined in the chart of one perspective lower. For instance, drift patterns in the weekly chart can be better seen on the daily chart, and drift patterns on the daily, in the hourly.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
I find small multi drift patterns invaluable. First, they are ubiquitous. They appear in virtually all trends and time frames. Second, their completion affirms that underlying trend remains intact. Finally, the manner in which they develop, for instance, the slope, extent and volume of the counter trend move can all offer clues as to the underlying strength of the trend.
Most strong trends unfold in a push - drift - push pattern, sprinting quickly in the direction of the trend, accruing a short term overbought or oversold, and then drifting counter to the sprint. As these patterns "drift" against the prevailing trend, they alleviate the short term overbought or oversold condition that accrued during the sprint. You can think of the drift as a "pause that refreshes."
It is important that the market DRIFT. The best examples contain overlapping price ranges (in whatever perspective you are working in) and don't typically retrace much of the prior sprint. Volume should generally decline throughout the pattern, particularly if the pattern builds over 5-10 periods. The best examples have substantial range overlap from day to day.
The classic literature requires a sharp move, or a flag pole, for these patterns to fly from, a decline in volume as the pattern builds and that the pattern last no more than 10-15 bars. In my experience, finding drift patterns that fill all these "requirements'' is difficult. My personal approach minimizes the requirements. As long as the pattern occurs after a decent thrust (I prefer the thrust to go to new high or low ground) and then drifts against the prevailing trend, I can use it to develop either a fresh entry to the prevailing trend or simply as a validation of the underlying trend.
Importantly, the pattern is typically better defined in the chart of one perspective lower. For instance, drift patterns in the weekly chart can be better seen on the daily chart, and drift patterns on the daily, in the hourly.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org